This interview was done as part of the 2021 Staking Ecosystem Report by Staking Rewards.
The report was sponsored by StaFi Protocol.
StaFi is the first DeFi protocol unlocking liquidity of staked assets. Users can stake PoS tokens through StaFi and receive rTokens in return, which are available for trading while still earning staking rewards.
Q: Do you think proof-of-stake based governance systems can be applied outside of protocol governance and grants? And how?
A: Proof-of-stake governance is more like DeFi governance, projects like Curve and Uniswap have done in a great way, a voting system and a contributed community are needed. Holders stake tokens and get voting power, The voting power could not only be used to vote for blocks but also vote for governance, that should be easy.
Q: How do we ensure and incentivize further decentralization within the staking ecosystem?
A: Current setting is set to incentivize stakers proportionally, which mean richs get richer. Setting a curve to reduce the reward with stakes that surpass a threshold, that will be more fair. but it is a realistic issue that we are facing in our normal life during the last decades, so changing some parameters won’t change the status quo too much. I have no excellent idea.
Q: What are the biggest challenges for Proof of Stake and Staking that we still have to overcome or may still face?
A: Holders still don’t recognize the effects of staking in consensus, stakers only know inflated reward, and some holders are afraid to suffer from fluctuation when staking, so the staking rate remains lower than the security line. Staking derivatives like StaFi rToken is an innovative way to solve that issue but lacks education.
Q: How can smaller Staking-as-a-Service companies differentiate themselves from large players like exchanges providing staking services (e.g. Binance, Kraken, Coinbase)? Is there a danger of centralization?
A: Consensus needs smaller staking service providers to be decentralized, if all stakes are from large players like exchanges, security issues are obvious. Staker from the community should be aware of the issues and delegate their stakes to the smaller and professional service providers. There are many professional providers out there, most of them have made a great contribution to the protocol, actively playing a heavy role on the development, governance and community, etc, I think those are the best way to differentiate themselves from the large players.
Q: What are your thoughts on the permissionless nature of staking from a legal standpoint? (due to no sign-up, or verification process, delegators cannot be explicitly forced to agree to the terms of service)
A: I am not a professional legal adviser or lawyer, so I cannot answer this question, but I personally like this decentralized staking service.
Q: There is a winner-takes-all sentiment emerging around staking derivatives. What do you think about this thesis?
A: The thesis is normal as we’ve seen out of the crypto, but the precondition of this thesis is we need a decentralized platform of staking derivatives. Dex like Uniswap are permissionless and decentralized, which makes it the lead, while there are other competitors, like stablecoin-focus Curve, community-driven Sushi, etc, all have the opportunity to win a piece of cake. Staking derivatives is innovative, but it is too new to be recognized, there is no winner yet.
Q: Since the overall space is not matured yet, at which point, do you think, should governments and central banks move to regulate the staking space?
A: I think it’s close. According to a report by JPMorgan, the current staking mechanism brings about $9 billion in revenue to the crypto industry every year. The report predicts that after Ethereum switches to Proof of Stake, this number may increase to $20 billion, and finally it will reach 40 billion by 2025. The point would be sometime after the phase1.5 of ETH2.0 is live, ETH could be a 2 way staking mechanism(staking and redemption) at that time, which means staking ETH is more feasible.
Q: How much resources should VC investors allocate towards staking/governance participation? And what’s the best approach for them to deal with those in general?
A: It depends on many factors, like the strategy of the VC, the stage of the protocol and the development vision etc. Long term VCs and promise projects will get more profit on the later stages, and TGE will also impact the profit earning of the VC at the beginning, all the remains can be staked and joined staking/governance. If we ignore most of the factors and simplify the model, I would say 70% of the allocation should be used to be staked or governanced.
Q: What are the core value propositions of liquid staking solutions, besides liquidity ?
A: Besides liquidity, the first one should be the DeFi capability. Value that has been staked could be used to integrate into the DeFi project. DeFi needs new assets, especially for the interest-bearing-assets. The other factor is the Mainnet security of PoS Chains, liquid staking will theoretically increase the staking rate of the consensus as many holders are afraid to stake.
Q: What are the biggest challenges for liquid staking solutions? Is there a risk of centralization?
A: Solutions for PoS chains are different, deployment won’t be a copy-paste work. I used to list the risks that we are facing. There are more than 10 kinds of difficulties, like how to choose a platform, how to ensure the token standard, how to avoid slash, how to get involved into the governance and how to make sure the MPC/Multisig works, etc. I can’t list all the difficulties here, I haven’t included the adoption issues here, but tbh they are many out there.
Q: An increasing portion of miner income on the current Proof-of-Work Ethereum comes from ordering transactions (often referred to as Miner Extractable Value). It is likely to assume that this will also continue into the Proof-of-Stake world. How do you think this will impact the staking market? Do you think the existence of MEV bears risks for the network? Do you think this can be mitigated?
A: This is an interesting question, I haven’t thought about MEV on PoS consensus, but I’ve marked it on my list.
Quickfire Round:
Q: Which upcoming protocol projects are you most excited about and why? Is there a protocol that no-one is paying attention to but should?
A: Layer2 would be the one I am most excited about, it will release the power of Ethereum and bring dapp built upon it into a new era. Some migrate projects from layer2 should be in your watch list, especially for the one which is limited by the higher gwei.
Q: Which network or protocol in the market do you think has the most future-proof token economics? And why?
A: Due to the open source, both in code and tokenomic, solutions tend to be similar, it’s hard to define which is the best one, only time will tell. Some protocols would try an innovative way, like FEI, their tokenomic are more like a beta experiment.
Q: Which network or protocol has the most sophisticated staking mechanism or staking use case that is not a Proof of Stake Layer 1?
A: Tezos’ staking mechanism is hard to understand but it is stable and solid, its philosophy solves the problems,like nothing at stake, long range attack, etc with an elegant “lock-up”, staker will receive all rewards and they can redeem part of staked token on each cycle, differential from some projects locked all staked token directly. Details of Tezos’ staking would be more interesting, you can read their paper.
Q: Which protocol has the best approach towards governance? And why?
A: I would say Curve. Although Curve has no consensus, CRV can be staked to get voting power and vote the proposals, earning distribution, and CRV gauge allocation, etc. I think voting power and its rich/related proposals.
Q: Which network or protocol in the market has so far proven to have the best “product-market-fit”? And why?
A: Uniswap I would say, simple, permissionless and easy to use.
Q: What could be done to increase overall awareness and participation in protocol governance?
A: Maybe incentive is a way. I prefer Futarchy, there is a phrase that describes its core: To have a say in a speculative market, you have to “put your money where your mouth is.” Those who know they are not relevant experts shut up, and those who do not know this eventually lose their money, and then shut up. Speculative markets in essence offer to pay anyone who sees a bias in current market prices to come and correct that bias.
Q: Do you see staking yields competing with DeFi yields? What are the implications of this on network security? How to balance these?
A: Yes, locked token value is competed between DeFi and Consensus, the one which provides higher yield will attract more tokens, with the growth of use cases on DeFi, there are many projects can generate the yield, most of them are higher than the inflated reward of Consensus, which will lead to a weaken status. Staking Derivative can balance the contradiction, farming with staking derivative instead of original PoS token would bring a higher security to the consensus while creating a new asset in the DeFi, it’s the interest-bearing assets.
Q: Are Staking Lock-Up times any good for protocols? Or unnecessarily overthinking protocol security?
A: Yes, lockup times are necessary to prevent protocol from attacks, like Nothing at stake ,long range attack, etc , it is an important part of the consensus, a permissionless proof of stake chain can’t be secure without it.
Q: We have seen a lot of talk about PoW’s energy consumption in recent months. How important is energy efficiency for PoS’ case when it comes to long-term adoption?
A: Miners consume energy to calculate the puzzle, while validators accept stakes to win a block, Minner are competitors while validators are cooperators, energy consumption is different internally because of the setting. We are long PoS consensus, it is energy efficiency, framework like Substrate and Cosmos SDK is robust and stable to be used, new PoW based chain is easy to be attacked without energy supports at the beginning.
Q: What is your vision of the staking economy/industry in 5 years?
A: Staking economy not only exists in the PoS consensus, but also has been widely used in Defi projects, including farming, being used as a collateral, or as a proof of token distribution, etc. With the development and growth in DeFi and the chain industry, staking will not only play a role as a service, but also as a tool that will empower the crypto industry in the coming 5 years.
Q: Ethereum 2.0 – What are you most excited about? What are you concerned about?
A: I am a big fan of Proof of stake, so Transformation from PoW to PoS makes me excited. Transformation is also one of my biggest concerns, because this process involves too many issues, such as security, assets, technology, communities, etc. This is a very large system of engineering.
Q: With an increasing market-lead for proof-of-stake based networks. Is there a future for proof-of-work besides Bitcoin?
A: I think so, because Bitcoin is there, but the team that can successfully launch the PoW consensus needs a better background, stronger community appeal, and stronger technical capabilities.